San Bernardino’s Route to Bankruptcy

San Bernardino’s Route to Bankruptcy

Two years ago this August, San Bernardino city treasurer David Kennedy issued a dire warning to a politically riven city council. “Budget gimmicks are only going to take us so far,” Kennedy admonished. Absent some drastic changes, he argued, it would soon be impossible to certify that the city could make its monthly payroll. At the same meeting, former city manager Charles McNeely likened year after year of shortsighted budgeting and unsustainable expenditures to the Bill Murray classic Groundhog Day. But the council largely failed to act on those warnings (in fact, McNeely left his post on May 1 of this year, citing the city’s “toxic” political environment). Finally, news broke last week that the city of 213,000, unable to cover its payroll next month, would seek Chapter 9 bankruptcy protection.

San Bernardino has some procedural hurdles to clear before it can declare bankruptcy officially. The city council this week postponed a vote on whether to declare a “fiscal emergency” that would allow it to bypass a state-mandated mediation period. But city creditors have already begun to demand payment in cash.

San Bernardino is, as Mayor Pat Morris calls it, a “blue-collar town”—and currently one with a 16 percent unemployment rate. The U.S. Census Bureau last year designated it the nation’s second-poorest city, behind only decrepit Detroit. Nearly 46 percent of residents receive some form of government assistance. “The reasons for our dilemma are multiple and long enduring,” Morris explained last week, after the council voted 4–2 (with one abstention) to authorize the bankruptcy filing. “They began long before the meltdown of our economy. We’ve been living on the financial edge for a long, long time. But we were unmasked by the meltdown in 2007 when we lost $16 million in sales tax in one year, when we lost 60 percent of our land value and 5,000 homes went into foreclosure.” The city also relied on $6 million annually in redevelopment money—sequestered sales-tax dollars overseen by essentially autonomous and unaccountable agencies—to help balance its budget. But Governor Jerry Brown abolished California’s redevelopment agencies this year in a cost-saving move, leaving San Bernardino further in the red after exhausting much of its reserve fund two years ago. Today the city’s budget deficit is an estimated $45 million.

Like most other cities facing a severe budget crisis, San Bernardino got into trouble because of its spiraling labor and pension costs. As with Stockton, which made headlines last month as the largest city in the United States to seek bankruptcy, the story of San Bernardino’s slide into insolvency involves decades of anemic growth compounded by a local government in thrall to public-sector union power. “Years ago, mayors and councils negotiated labor contracts that were far, far too generous for this generation of service,” Morris says. “Those are unsustainable in this current marketplace.”

Much of the growth in labor costs came from police and firefighter unions, with whom renegotiation will be difficult. Three-quarters of San Bernardino’s general fund goes to cover public-safety costs, of which 80 percent is compensation. Firefighters’ wages averaged just over $130,000 in 2010, while police officers averaged closer to $95,000—this in a city in which over a third of the population lives below the poverty line. In 2010, San Bernardino’s highest-paid employee was a police sergeant, who took home $317,179. He and his fellow officers benefited from an amendment to San Bernardino’s charter, enacted in 1955, that based salaries on average police and firefighters’ wages in ten comparably sized California cities. Problem is, most of these cities—including Pasadena, Huntington Beach, Irvine, and Thousand Oaks—have per-capita incomes at least double that of San Bernardino’s. As Morris points out, his city simply lacks the tax base to sustain those wages.

Voters could address the pay issue by amending the city charter again, but pensions are a more challenging problem. San Bernardino’s police and firemen enjoy the now-notorious “three percent at 50” plan, in which cities calculate pensions at a rate of 3 percent of the average of an employee’s three highest years’ salary, multiplied by the number of years worked, starting as early as age 50. Using sick time and vacation days to “spike” pensions is also commonplace. And in San Bernardino, as in so many other cities struggling to remain solvent, the police and firefighters don’t contribute to their pensions.

The alliance of public-sector unions and their politician employers has been toxic to any meaningful reform in San Bernardino, where the demands of local interests often confound standard left-right explanations. City leadership has been split for nearly a decade, with factions aligned with Morris quarreling with allies of city attorney Jim Penman, who twice ran for mayor against Morris and lost. In 2009, the city council approved a plan to impose furloughs as part of an effort to close what was then a mere $9 million deficit. Police and firefighter unions sued; a federal court rejected the police union’s claims last year, but firefighters won a $1.7 million judgment against the city.

Penman claimed last week that he had evidence that city budget officials had falsified documents for 13 of the past 16 years. “The mayor and the council were not given accurate documents,” he said. When pressed by reporters at a news conference, though, the city attorney wouldn’t elaborate. And, in any event, Penman’s claims of fraud don’t square with the many public warnings of impending insolvency the mayor and the council heard from the city’s treasurer and manager over the past several years. The problem of uncontrolled pension and entitlement spending, in San Bernardino and around the state, is hardly new.

Unfortunately, bankruptcy offers no guarantee that a city will change its pension contracts with public employees. Vallejo, which emerged from bankruptcy last year, didn’t touch its retirees’ pensions. Stockton officials have also indicated they have no plans to change their pension plans for existing or future retirees. A bankruptcy judge in San Bernardino cannot rewrite the section of the city’s charter that inflates public-safety workers’ wages. Only voters can do that, through the initiative process.

Despite the turmoil, San Bernardino in September will host its annual Route 66 Rendezvous (an event financed through a special fund). Route 66—both the road and the song—are integral to San Bernardino’s identity. The road brought visitors to and through the city; San Bernardino is the last stop in the song before Los Angeles. Of course, the interstate highway system supplanted the old Route 66 decades ago. In our imagination, the road still runs from L.A. to Chicago. In reality, the road that more closely connects Illinois and California today is the one heading to fiscal calamity. San Bernardino is one more stop on that itinerary.

Jeremy Rozansky is a 2012 Publius Fellow of the Claremont Institute and a recent graduate of the University of Chicago, where he helped found and edit Counterpoint, a conservative quarterly.